Cherie Trewavas, a BNZer who specialises in banking non-profit organisations, shares her insights on building the financial capabilities of NPOs.
In a recent post about financial basics for non-profit organisations, I talked about the importance of running an efficient business and how your primary financial statements are the key to doing this. I went into some detail on one of these documents — the profit and loss statement — this time, I’ll look at the second of these essential documents — balance sheets. But don’t just take my word for it, keeping a balance sheet, along with a profit and loss statement, is something all businesses (including non-profits) must do in order to meet the minimum financial reporting requirements as set out by the IRD. Find out more about these minimum requirements on the IRD website.
What is a balance sheet?
A balance sheet — also known as a statement of financial position — presents a snapshot of the financial position of the organisation at a given point in time. Simply put, it summarises what you own versus what you owe at the end of the financial year and lets stakeholders learn about the fundamentals of your group’s financial position. i.e. how much cash you have and how easily you can pay your debts.
Balance sheets are made up of three main components:
At its most basic level, the equity is what is left after subtracting the liabilities from the assets. So far, so simple, however, it does get a tad more complicated because of the way your assets and liabilities need to be classified as current or non-current.
Current means the things for which the benefit will be seen in the current financial year. Non-current are things where the benefit won’t be realised until sometime outside of this 12 month period.
The assets section of a balance sheet will list any cash sitting in the bank along with other assets, which can be things like land, buildings, furniture and equipment. As I mentioned above, these assets need to be separated into current and non-current to figure out which accounting period the benefit should be attributed to. Current assets will be cash in the bank while non-current could be something like a term deposit that won’t mature for a couple of years — it’s still an asset, but you won’t see any benefit until later on.
Next up on the balance sheet is a list of liabilities. This means things such as debt and income tax payable. Again, these liabilities are divided into current and non-current. A term loan is a good example of a non-current liability, while income tax payable is classed as current.
The liabilities total is subtracted from the total in the assets column, and you end up with equity — what belongs to your non-profit group.
At this point you’re probably thinking this all sounds very similar to the profit and loss sheet, and you’d be right — at a first glance, at least. The difference is in the way they treat time. Whereas the profit and loss statement looks at the income and costs as they’re happening to show if you’re profitable, the balance sheet takes a broader look at all of these component parts — including long term assets and liabilities — and shows how much your organisation is actually worth, not just how much money is coming in or leaving.
But wait, there’s more.
There are still more intricacies to come to grips with when it comes to classifying the outgoings and deciding which document to record things in. For instance, repairs and maintenance would go on the profit and loss sheet but capital expenditure (purchasing a new asset) goes on the balance sheet. To help get you thinking in the right way, ask yourself; Are we spending money on maintenance or assets?
Obviously, keeping track of everything at this point is getting trickier. That’s where good book keeping habits come in, and we’ll look at them in the next blog.